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Shock U.S. Data Triggers Recession Alarm as Global Stocks Plunge

Last Updated March 4, 2021 2:41 PM
Joseph Young
Last Updated March 4, 2021 2:41 PM

The unexpected fall in the U.S. equities market sent global stocks plunging as major stock indices in China and South Korea fell by 0.9 to 2 percent.

The SSE Composite, which represents all stocks listed on the Shanghai Stock Exchange, fell by 0.92 percent on the day while the Kospi dropped 1.95 percent.

Holger Zschaepitz, market analyst at Welt, said :

“Global stocks plunge to 1 month low on US data shock. US manufacturing ISM hits decade low. Bulls hope US-China talks will ease econ woes. Bonds pare gains with US 10y yields at 1.66%. Gold a tad higher at $1477 as Fed fund futures price in 80% chance of Fed cut in Oct. Bitcoin $8.2k”.

Analysts have attributed the overnight drop in the global stock market to the extended recession of the American manufacturing sector that has struggled to rebound due to the lack of progress in the U.S.-China trade talks and the inability of manufacturers to lay off the surplus.

Strategists turn dovish on stocks

Throughout 2019, most major stock markets in Asia, especially China, South Korea, and Japan, have heavily depended on the performance of the U.S. equities market and the sentiment around the trade talks.

However, shocking data from the U.S. manufacturing sector and other key markets are expected to further intensify the downward trajectory of Asian stocks, particularly as strategists anticipate that more cuts on the benchmark interest rate is unlikely to lead to a short term trend reversal to the upside.

Zschaepitz added:

“Fed rate cuts not likely to fuel stocks higher as they did in 1990s, UBS says: Fed-easing rallies of 1990s were made possible by inverse correlation between rates & P/Es. This relationship no longer exists. Since Fed easing began in Jul, lower rates have translated to lower S&P 500.”

Central banks globally have taken a more dovish stance as of late and the European Central Bank (ECB) has been criticized for introducing stimuli that is not proportionate to the slowing growth rate of the global economy.

Simply put, other central banks in Europe  have said that they do not agree with the decision of the ECB to boost the economy in the magnitude that it has, which has critically provided European stocks with relief from a larger sell-off.

Investors optimistic towards European markets

European stocks have recovered fairly strongly in recent weeks as a result but investors remain skeptical towards the sustainability of the upward trend.

In the short term, as Asian stocks and stock indices see a continuous downward trend, strategists foresee growing demand towards safe haven assets like gold and bonds.

“A bull or a bear market is a function of what you own. Most people want to own stocks slipping down from the highs – so all they get is a bear market,” Basant Maheshwari, Partner Basant Maheshwari Wealth Advisers LLP, said .

In the past six months, the SSE Composite has plummeted by more than 10 percent from 3,250 points to 2,900 points despite reports of a potential partial deal by the end of October.

No partial deal in October could prove disastrous for Asian stock market

So far into the last quarter of 2019, the U.S. remains as the only stock market to benefit off of the slight progress in the talks.

The sell-off in the Asian stock market has been so intense that the noticeable increase in anticipation for a deal has not provided any relief.

A no deal October could leave Asian stocks vulnerable to a full blown bear market, even after falling by 10 to 20 percent within a six-month span.